from the seems-dark-down-there-under-the-bus dept

If John Steele and Paul Hansmeier didn't realize they were in serious trouble already, things just got a lot more difficult for them. As you may recall, Steele and Hansmeier have been bending over backwards to insist that they had nothing whatsoever to do with Prenda Law, and that they got no money from any of the settlements. Courts haven't been buying this argument, and earlier this week we wrote about Judge Chen in Northern California noting that he was convinced that Steele and Hansmeier really were Prenda. But the evidence just got a lot stronger. It appears that Steele and Hansmeier's attempt to throw lawyer Brett Gibbs under the bus has just come back to haunt them. Gibbs has just made a filing in the Judge Otis Wright case in the Central District of California (the first case to directly state that Hansmeier and Steele were clearly behind Prenda) that might be Steele and Hansmeier's worst nightmare: because it reveals a spreadsheet showing how most of the Prenda settlement money went to them.

Ostensibly, the filing from Gibbs is an attempt to get out from Judge Wright's order which lumped in Gibbs with Steele, Hansmeier, Duffy and Lutz as "principles" of Prenda, making them all responsible for the attorneys' fees. Gibbs has been trying to distance himself from the Prenda crew for a while, but with this filing he reveals the real meat: it seems that there was a Dropbox account that was shared between Gibbs, Hansmeier and Steele, and in it was a spreadsheet revealing the payouts from Prenda settlements. And while Steele and Hansmeier have told courts that they are not associated with Prenda and not making any money from the cases, the documents... show otherwise.

Steele and Hansmeier have repeatedly claimed that they have no ownership interest in Prenda Law, AF Holdings or Ingenuity 13 and that all settlement proceeds are held in trust accounts for use in future litigation. For example, in the bar complaint filed in this Court, Steele stated “I have never had an ownership interest in Prenda Law Inc”; “I have never had an ownership interest in AF Holdings LLC or Ingenuity 13.” (Id. at pg. 83). In his deposition, Hansmeier testified that he had “no ownership interest [in AF Holdings] whatsoever” and that proceeds from settlements went into an attorney’s trust account and were withdrawn only to pay expenses of litigation. (ECF No. 69-1 at pgs. 9-13).

The truthfulness of these and similar statements is severely challenged by two documents which Prenda Law sent to the Dropbox account on Gibbs’ computer in early 2013: “Prenda Law Profit and Loss Detail, January through December 2012” and “Prenda Law Balance Sheet Detail.” (See Exhibits E and F). The receipt and disbursements shown in these spreadsheets directly contradict the oft-repeated statements of Steele and Hansmeier that they have no financial interest in Prenda Law or its litigation.

According to the Prenda Law Profit and Loss Detail, in 2012 alone, Prenda made “Payments to Old Owners”—Hansmeier, Steele and Under the Bridge Consulting (their jointly-owned company)—equal to almost 70% of Prenda’s total revenue. Hansmeier received $645,821.29 ($185,321.28 directly and $460,500.00 through Under the Bridge). Steele received $660,915.94 ($200,415.94 directly and $460,500.00 through Under the Bridge). This does not include tens of thousands of dollars in additional payments to or on behalf of Steele and Hansmeier for travel and entertainment, meals, credit card charges, and miscellaneous reimbursements, or payments to Steel’s wife, Kerry Eckenrode Steele. It also does not include payments totaling $37,069.56 to Duffy or Duffy Law Group, also classified as “Payments to Old Owners.” Judging from the documents it appears that neither the Profit and Loss Detail nor the Balance Sheet Detail show any payments to AF Holdings, Ingenuity 13 or other Plaintiffs represented by Prenda.

Exhibit E shows that Prenda received income from “Pirates” of $1,931,977.09 in 2012, and made “Payments to Old Owners” of $1,343,806.78 or 69.6% of its total receipts. Considering other payments to or for Steele, Hansmeier and Duffy, the total distributed to them likely exceeded 80% of receipts, even though these distributions left Prenda with a 2012 loss of $487,791.20. These figures do not include payments to Steele and Hansmeier from other Prenda accounts, or settlements that may have bypassed Prenda completely.

In an affidavit, Gibbs points out that Hansmeier had told him earlier that Steele and Hansmeier had setup "Under the Bridge Consulting" (nice troll reference guys, very subtle) and each had a 50% stake. As Gibbs points out, this very strongly supports Gibbs' earlier claims and reinforces that idea that Steele and Hansmeier are both the powers that be behind Prenda and that they directly lied in the past concerning their involvement. While the spreadsheets do say "old owners," Gibbs' filing correctly notes that (1) this suggest they at one time did own Prenda and (2) getting more than 70% of the revenue going to "old owners" certainly doesn't suggest that those two were no longer involved in the business.

Separately, in the filing, Gibbs notes that Hansmeier called him after Wright's original ruling, trying to get him to sign a document that would require him to lie, and also to indemnify both Hansmeier and Steele, in order to be included under the bond that Duffy, Hansmeier and Steele were organizing as required by Judge Wright's order. Basically, Hansmeier offered Gibbs a terrible deal: to get in on the bond that we're getting, you have to lie to the court and then basically accept any and all liability that may come down because of all this. Gibbs, quite reasonably, rejected the deal, leading to this filing now:

After receiving the May 6 Order, Hansmeier telephoned Gibbs in an attempt to persuade him to work with, not against, the Principals as they appealed the Order. Over several conversations, Hansmeier conveyed to Gibbs exactly what he would have to do to be covered by the superseadous bond which the Principals were arranging to purchase. Knowing that Gibbs would not be able to post sufficient collateral to buy a separate bond, Steele and Hansmeier made six demands which Gibbs would have to accede to before they would add him to their bond: (1) Gibbs pay $3,000 to Hansmeier and Steele to reimburse them for the entire cost of the bond; (2) Gibbs sign a unilateral Release and Settlement Agreement releasing any and all claims he might have against Duffy, Steele, Hansmeier, Prenda Law, Steele Hansmeier PLLC, and Alpha Law Firm” (See Exhibit A); (3) Gibbs agree to sign a declaration stating (falsely) that Steele had no involvement in a Florida copyright case; (4) Gibbs represent AF Holdings and Ingenuity 13 in their appeal of the May 6 Order; (5) Gibbs sign an agreement that would create a fiduciary relationship between Gibbs and both Steele and Hansmeier;2 and (6) Gibbs sign an agreement indemnifying Steele and Hansmeier

against any and all claims, demands, actions, suits, losses, costs, charges, expenses, damages and liabilities whatsoever which [they] may pay, sustain, suffer or incur by reason of or in connection with the appeal of the May 6, 2013 order issued by Judge Wright in Case No. 2:12-cv-8333-ODW (JCx) including, without limiting the generality of the foregoing, all costs and expenses (including legal expenses) incurred in connection with any such loss or damage. (See Exhibit B).

The unilateral release and the indemnity agreement proposed by Steele and Hansmeier would have made Gibbs solely liable for the full amount of the monetary sanctions imposed on all of the parties in the May 6 order, as well as the costs and attorneys’ fees incurred in appealing the order. Steele and Hansmeier were also trying to force Gibbs to testify dishonestly or remain silent with regard to the Principals’ fraudulent activities. Gibbs rejected their offer and was not included on the bond.

It's quite incredible that Hansmeier apparently thought Gibbs was so stupid as to accept such a terrible deal. There's a bunch more in the filing worth reading, but these are the highlights -- and ones that I'd imagine are about to be refiled in a number of other Prenda-related cases around the country. My only question, however, is why Gibbs waited until now to file this...

Still, assuming that this information turns out to be legit, and there's no reason to think it isn't, Steele and Hansmeier may be in for a world of trouble. Everyone knew something like this was coming eventually, but I can't see how the two of them will tap dance around this one.

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Or, also quite likely, the poster actually IS either Steele, Hansmeier or Duffy. That was my first impression, not that they were a troll. The person seems to use much of the same language and arguments as Prenda has been filing so Id figure either its one of them or its someone emulating them for some reason, maybe someone related to them.

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Possible, Steele at least has been caught several times trolling the various sites discussing his 'cases', with just as much maturity as you could expect from such an individual(which is to say his actions make toddlers look like the height of sophistication in comparison).

Horse meanwhile never seems to miss an opportunity to insist that it's all the judge's fault(and apparently missed the fact that this case doesn't involve Wright... yet), for having a vendetta against such 'outstanding defenders of copyright', ever so conveniently ignoring all the evidence of illegal, and quasi-legal actions on behalf of Prenda that might suggest that they aren't quite as innocent as he portrays them as.

Given the massive, intentional ignorance of all evidence contrary to his position, and his repeated claims that it's the judges that are at fault, not Prenda, I'd say it would be a safe bet that he's got some stake in them getting away with their actions, either directly or otherwise, though personally I'm betting it's just AJ under another name, as the 'logic', argument style, and tendency to fling around insults like party favors is pretty similar between the two.

My only question, however, is why Gibbs waited until now to file this...

At a guess, he was waiting to attempt to use it as a bargaining chip when the feds came knocking. That's exactly the sort of information that an IRS investigator would be looking for to reconstruct Prenda's finances.

Basically it's a huge trump card that he just played. Possibly his best trump card. So I'd say the question is less "Why did he wait until now to file this?" and more "Why did he decide to play such a big trump card now?"

"Basically it's a huge trump card that he just played. Possibly his best trump card. So I'd say the question is less "Why did he wait until now to file this?" and more "Why did he decide to play such a big trump card now?""

Perhaps because Prenda will loose their appeal now that Steele has testified in court on the matter he invoked the 5th in Wright's court - which is a big problem for Steele since he isn't allowed to selectively invoke the 5th on the same issues. So, time for Gibbs to get out as much he can before the hammer drops. That and it is increasingly obvious how much S&H are hanging out Lutz to dry.

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Agreed. The below smacks of a certain desparation:

22. I apologize to this Court for mischaracterizing the property at 635 South Vanderwall Avenue in West Covina as "a very large estate." I did not intend to mislead this Court by using this erroneous subjective characterization. I hope that this Court understands that what it first perceived as a lie was an inadvertent mistake that was not intended to deceive.

23. I did not knowingly ignore any Court order in this case. I did not ever testify or act in bad faith before this Court.

He knows it's coming and is trying to return the under-bus-throwing favour he's been paid by S & H.

Regardless, Gibbs is still an asshole, I don't believe #22 or #23 for a second, and hope Wright doesn't either.

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Ah, as some people over at Popehat pointed out, October 15th was the late filing deadline for 2012 taxes. If Steele and company had not properly reported their income to the IRS before then, Gibbs filed this after their last chance to file corrections with the IRS. So they can't reaction to this revelation by going "Oh crap, better report that income to the IRS before it's too late to do so without penalty."

I am so glad....

...that I decided not to pay these scumbags when they tried to shake me down. Not JUST because I saved $4g, and not JUST because I didn't enrich these guys...but because I'd have such a hard time living with myself reading all this stuff knowing I'd made the wrong move and stupidly knuckled under to extortion.

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Movie plot

I'm not a huge fan of Hollywood movies, I find it hard to watch movies with unbelievable plots. If I was watching 'Prenda Law - A Tale of Deceit' I would have switched it off by now for being ridiculous. Yet - here it is actually happening. Incredible.

Separately, in the filing, Gibbs notes that Hansmeier called him after Wright's original ruling, trying to get him to sign a document that would require him to lie, and also to indemnify both Hansmeier and Steele, in order to be included under the bond that Duffy, Hansmeier and Steele were organizing as required by Judge Wright's order. Basically, Hansmeier offered Gibbs a terrible deal: to get in on the bond that we're getting, you have to lie to the court and then basically accept any and all liability that may come down because of all this

If this is true: why do it as a written contract? IANAL, but I'm pretty sure that a contract requiring you to commit perjury is unenforceable, plus it could end up being used as evidence.

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They'd probably need the contract in writing if they wanted to get it to stick as far as making Gibbs the one responsible for all the charges. From the looks of things, every point would be a separate document signed, so the contract would be separate from the false declaration. Thus it would survive the declaration being ruled false.

Plus Gibbs signing the declaration, then coming back later to say it was false would mean he'd committed perjury, and they probably figured the threat of that would be enough to keep him from speaking up after the fact.

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Or, more likely IMHO, the request that he sign the contract was made in jest knowing full well that Gibbs would never be stupid enough to agree. Basically it was saying "no, you cant join in on our bond, you chose you side now F off"

The thing I find worrisome about that document they tried to get Gibbs to sign is that while Gibbs is smart enough not to sign it, Lutz probably is not smart enough not to sign something very much like it.

His warped ethical compass combined with his greed and naivete could very well have allowed Hansmeier to convince Lutz to sign something that pretty much says Lutz is responsible for everything and that he was directing Hansmeier and Steele and not, as is clear to anyone with half a brain, the other way around.

While there would still be consequences for Steele and Hansmeier, they may avoid some of the worst of it because Lutz isn't savvy enough to get his own legal counsel and has let himself be manipulated into being the sacrificial pawn.

And anytime a thought like that occurs to Lutz, they convince him that won't happen and they'll take care of him and the poor sap actually believes it and allows himself to be manipulated even more.

He probably thinks he is playing with the big boys when, in reality, the 'big boys' are playing him for a chump.

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Even with a signed document from Lutz, they are still toast at this point. They repeatedly "mislead" (read as LIED THEIR ASSES OFF) to various courts. They can try more smokescreen stunts, but no one will be biting.

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Fairly certain that Lutz is the pawn here.. Especially as he was on Prenda's monthly payroll until at least February 2012, when they went to ADP (company that does payroll for you), so you can't see the payroll breakdown after that.

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wshuff...yeah you are correct, people downloaded their porn and did not pay for it, they must pay $5000 and also sign a document saying they are responsible for everything that Steele and Hammershite are doing.

Damn maybe they can get the pirates to pay again as the first payment has caused them to believe that pirates would never fight this case and if they had not made those payments they would not have demanded money from other pirates, damn that must make sense to someone like Steele and Hammershite.

If you are reading this Mr Steel it is a joke, seriously dont use this tactic it is a joke not a serious proposition.

... "is there a plausible result in this case that will significantly affect the interests of the legal profession (positively or negatively)? If so, the case will be decided in the way that offers the best result for the legal profession."

If Prenda hadn't gone into the deep end, they'd still be porn trolling - there's lots of money to be made in shaking down "flyover people", I reckon. Moderation in all things, even porn trolling.

They had a fiduciary responsibility to their clients to keep settlement funds in separate trust accounts.

Everything else was merely fraud and perjury. Some lawyers do that all the time, and the punishment is typically a raised eyebrow from the judge.

But this is actual malpractice.

I believe this is so serious that the only way to recover is to admit Prenda is the true owner of the shell companies. Otherwise each deposit into the main account is another count of embezzlement.

It's would take months to create a fake paper back-story. One showing that each settlement was authorized by the 'client' and the whole amount was immediately authorized to be paid to Prenda as a fee. This has to be airtight enough to document why trust accounts weren't created, even for a day. To do it in a believable manner would mean creating the accounting story, checking it for holes, then feeding entries into a fresh OS with the clock rolled back, moving the clock forward for each new entry and creating daily/weekly "backups".

Curiously, Gibbs did give them five months. Enough time to create the accounting fiction, while still saving his own skin.

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"They had a fiduciary responsibility to their clients to keep settlement funds in separate trust accounts."

Are those trust accounts required to be actual separate bank accounts? Or is a single physical bank account sufficient but having ledger entries that separate out into different GL accounts acceptable? Many companies have a single primary bank account, but the books have separate GL accounts for marketing, product development, manufacturing, payroll, etc.

Peircing the Coporate Veil

They had a fiduciary responsibility to their clients to keep settlement funds in separate trust accounts.

Everything else was merely fraud and perjury. Some lawyers do that all the time, and the punishment is typically a raised eyebrow from the judge.

But this is actual malpractice."

It also seems that this co-mingling is also fatal to any claims that Ingenuity 13 and AF Holdings are real corporations, separate from Steele and Hansmeier. This should be a killer at the Order to Show Cause in Judge Chen's court in SF:

"3. Order to Show CauseAccordingly, the Court hereby orders AF, Mr. Steele, and Mr. Hansmeier to show cause as to why the judgment should not be amended to add Mr. Steele and Mr. Hansmeier as debtors for the attorney fee award. The Court further orders Mr. Steele and Mr. Hansmeier to show cause as to why sanctions against them should not be issued pursuant to the Court’s inherent authority (with the issue of personal jurisdiction being addressed by the order to show cause)"

The co-mingling of funds would seem to show dispositively that Steele and Hansmeier should be added as separate debtors because the corporations are fiction (and the supposed trusts may be as well, I don't think any court has ever seen the purported trust documents or any articles of incorporation).

Under The Bridge

I've been lurking the various Prenda articles for a while, so I'm shocked I never knew that they had a jointly owned holding company called "Under the Bridge Consulting". Seriously, patent trolls with a company called Under the Bridge? Isn't that a bit on the nose?

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Allow me to explain Prenda's defense soon:1) Alan Cooper and Mrs. Eckenrode must have created "Under the Bridge" because the Prenderats would never have used an allusion to trolls.2) We told the truth all the time - that infamous deposition only said that money from these cases were used for litigation coses. So, all the transfers to Steele, etc. were for litigation-related costs, of course!

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You left out this one:

3) The doctored evidence presented in the spreadsheet could have only been planted by someone who could both travel in time and space, so it must have been The Doctor!

(aka, "the Timelord did it "defense. Like the "Chewbacca defense" but referring to a different subset of science fiction that cannot be questioned nor cross examined. After all, how do you subpoena a Timelord?)